India has decided April 1 as the date when the proposed tax laws on digital assets will go into effect and bring the crypto industry under a regulatory framework. The government has not provided any breaks on the infrastructure costs for the establishment of the crypto ecosystem in the country. It is also not looking to treat crypto mining as a cost of acquisition, which has triggered concerns amid crypto businesses and investors who are already looking at a 30 percent tax on crypto-generated incomes in India.
The Lok Sabha passed the Finance Bill, 2022 earlier last week. As per its decision, the government of India is not looking to provide any tax relaxations or benefits to crypto miners and players, who are likely to spend hefty amounts to keep the crypto ecosystem up and running.
The first indication of India's skeptical take on the crypto sector came on March 21, when Pankaj Chaudhary, the Minister of State for Finance addressed questions in the Lok Sabha, pertaining to the status of cryptocurrencies in the country.
Chaudhary told the Lower House of the Parliament that no deduction in respect to any expenditure, other than the cost of acquisition, would be allowed under India's laws.
"As per the proposed section, any income from transfer of VDA (virtual digital assets) shall be taxed at the rate of 30 percent. Further while computing the income from transfer of VDA, no deduction in respect of any expenditure (other than cost of acquisition) or allowance is allowed. The Bill also proposes to define VDA If any asset falls within the proposed definition. Such virtual asset will be considered as VDA for the purposes of the Act and other provisions of the Act will apply accordingly," Chaudhary had said.
Essentially, India's clarification on the crypto assets does not show its inclination on incentivising crypto activities as for now.
Insiders fear that investments in the digital assets category could dwindle among Indians if the government continues to bury the sector under financial dents.
“India has millions of cryptocurrency users. These kinds of tax clarifications can hinder the growth of the crypto ecosystem,” Edul Patel, the CEO and Co-Founder of crypto investment firm Mudrex told Gadgets 360. “India including crypto in the budget, recognising it as an emerging asset class, was welcomed across the crypto industry. But the classification given in Lok Sabha is not a progressive move.”
Speaking to Gadgets 360, Sathvik Vishwanath, the CEO and co-founder of Indian exchange UnoCoin highlighted that the cost of crypto miners in terms of electricity usage and equipment purchasing must be treated as an expense at one shot.
“The present capital asset and depreciation methodologies work well with traditional machinery and manufacturing setups. The mining ecosystem we are talking about only will be relevant for one or two years only after which it will get replaced by newer versions making the old ones inefficient. So, it is better if the tax rules treat the cost of miners as an expense at one shot or at least allow depreciation like other capital assets such as buildings, computers and machines,” Vishwanath noted.
Indian crypto players say that it would be “unfair” to tax the earnings reeled in by crypto mining at 30 percent, which leaves a very thin profit margin for the miners as they have to pay to maintain hardware, Internet, and electricity. In addition, purchasing graphic cards, mining machines, and other advanced mining equipment may cost industry players more that they would see in profits after the 30 percent tax.
“The government may or may not allow you to offset operational costs such as electricity, but they're definitely not allowing offsetting the capital expenditure on equipment. No offsets only means that the break-even will be pushed to 3-5 years; currently, the crypto mining industry has a break-even of 2-3 years. This will put a lot of pressure on the investors too; people won't be willing to invest in crypto mining as they won't be incentivised a lot to get into crypto mining at a commercial scale,” Anshul Dhir, Co-Founder at EasyFi Network told Gadgets 360.
It is imperative to keep in mind that India has also decided to cut a Tax Deducted at Source (TDS) of 1 percent on the payments made for the transfer of digital assets, adding additional financial liability on crypto investors and traders.
Indians involved in the crypto space have criticised the government's stance on Twitter. Polls have been launched urging Finance Minister Nirmala Sitharaman to introduce ‘reasonable' crypto policies.
Addressing the Lok Sabha, Choudhary also added that any loss arising from crypto transactions will not be allowed to be set off against the income arising from the transfer of another virtual digital asset (VDA).
Ashish Singhal, the co-founder and CEO of CoinSwitch Kuber exchange, labelled India's clarification on the crypto assets category “detrimental” for India's crypto industry.
Presently, crypto trading and holding is allowed in India. There are no official cryptocurrencies that are used as payment methods in India. Meanwhile, the Reserve Bank of India is working to create its own Central Bank Digital Currency (CBDC), that is tentatively named 'Digital Rupee'.
The crypto industry, which emerged with the arrival of Bitcoin in 2009, has exploded in the last thirteen years. Its current market cap stands at $1.93 trillion (roughly Rs. 1,46,99,290 core) as per CoinMarketCap.
In comparison, Thailand recently revoked a decision to levy a 15 percent tax on crypto profits. The reversal came after the taxing decision was met with a massive public outcry in Thailand.
Australia is also working on taxing the crypto sector. Australia's Board of Taxation (BoT) has been directed to present a comprehensive report to the government by the end of 2022. The authorities have been asked to keep the tax burden on crypto investors as minimum as possible.
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